Directors, investors at odds over executive pay

WASHINGTON — Two-thirds of the people sitting on company boards believe executive pay has spurred strong performance, while less than a quarter of big investors draw that link, a report released Tuesday shows.

Both parties agree that lavish executive compensation has tarnished the image of corporate America, a resonant issue amid the widening scandal over the suspicious timing of stock-option grants to top executives.

Among 50 company directors surveyed, 65 percent said they believe that U.S.-style executive pay and perks have contributed to company achievement. Only 22 percent of the 55 surveyed institutional investors — pension funds and mutual funds that manage some $800 billion in assets — took that view, according to the report by consulting firm Watson Wyatt Worldwide.

Directors are charged to act as corporate watchdogs, the first line of defense in protecting shareholders' interests. At several major companies, directors were put on the defensive this spring by institutional investors angered over their having approved big pay packages for executives.

Nearly all the big investors polled in the survey believe that executives at most U.S. companies are overpaid and exert undue influence over how their pay is determined. By contrast, 61 percent of the directors said most executives are overpaid and 48 percent believe they wield too much influence over pay.

"Despite major reforms, executive pay and corporate governance continue to be a source of controversy," Ira Kay of Watson Wyatt said in a statement. "While the views of directors and institutional investors on executive-pay issues are closely aligned in many areas, we found several differences between the groups, demonstrating that more work is needed on a few key issues."

While most directors believe the executive-pay system needs to be overhauled, "they are unlikely to make dramatic changes to their [compensation] programs," Kay said.

Irritation among company shareholders and the public over lavish executive pay continues. The Securities and Exchange Commission (SEC) is expected to adopt this summer the biggest changes in rules governing disclosure of executive compensation since 1992. Public companies for the first time would be required to furnish tables in annual filings showing the total yearly compensation for their chief executive officers, chief financial officers and the next three highest-paid executives.

The true costs to the company bottom line of the executives' pay packages, including stock options, would have to be spelled out.

Meanwhile, at least 46 public companies are under investigation by the SEC or federal prosecutors for possible manipulation of options grants to increase their value to the recipients. While the practice may not be illegal in itself, it appears many companies did not follow accounting rules requiring them to deduct that added compensation in their earnings calculations.